This market seems to have adopted a shoot first, ask questions later attitude. When Dick’s Sporting Goods Inc. (NYSE:DKS) reported earnings recently, the stock dropped 10% on the perception of disappointing results. However, if you look at the company’s actual numbers, there wasn’t anything that long-term investors should worry about. With the stock still down over 7% from its price prior to earnings, this might be a good entry point for opportunistic buyers.
Several positive factors are moving this category
In the sporting goods industry, there are several forces that should help retailers like Dick’s and their competition Foot Locker Inc. (NYSE:FL). The first positive is, the increase in innovation because of smaller competitors like Under Armour Inc.(NYSE:UA). This apparel and footwear company has been pushing the category forward for several years, with innovative concepts and new designs. Partially because of Under Armour, Nike, Inc (NYSE:NKE) has been forced to innovate and raise the value of their product line as well.
A second positive factor working for this industry is, the movement toward a more active lifestyle. As education increases around the benefits of staying active, more customers are buying clothing and equipment to try and get in better shape. In addition, companies like Weight Watchers, Jenny Craig, Medifast, and others, suggest a level of activity to improve results. The more people think about getting in shape, the better the sporting goods industry should perform.
What are investors worried about?
One issue some investors are worried about is, the negative same-store sales at Dick’s Sporting Goods Inc. (NYSE:DKS) over the last three months. However, if you look at the company’s longer-term trend, this isn’t a big deal. Over the last year, Dick’s comps. have been positive by as little as 0.1% and as much as 8.4%. The weakest quarter is the 4th quarter, and last year same-store sales were down 2.5%. This year, same-store sales at Dick’s were down 2.2%. As you can see, same-store sales don’t see to be a big issue.
A second worry for investors seems to be around the idea that Dick’s is investing for the future. The company specifically said they will be investing in, “advanced mobile capabilities” and piloting in-store pick-up. The company expects these investments will crimp short-term earnings, but improve Dick’s long-term growth.
Given the company’s huge eCommerce growth, these investments make sense. In the current quarter, Dick’s Sporting Goods Inc. (NYSE:DKS) showed a 54.2% increase in eCommerce sales. When you combine the company’s idea to increase their mobile capabilities (i.e. a mobile app), with the potential roll out of in-store pickup, both should drive better eCommerce sales. Since online sales don’t require the same amount of overhead as sales in the store, these are smart moves.
Is the company’s growth in trouble?
Investors looking to buy Dick’s Sporting Goods Inc. (NYSE:DKS) stock should be primarily concerned with whether the company can meet earnings growth projections. One way that Dick’s can improve their business is by increasing their gross margin.
Two of the company’s biggest customers are Nike, Inc (NYSE:NKE) and Under Armour. Analysts are calling for better than 10% EPS growth at Nike, and more than 21% growth at Under Armour. Nike’s broader product line, and less premium pricing, causes the company’s gross margin to come in at 42.62%. Under Armour on the other hand, has higher pricing and sports a margin of 50.26%. These healthy margins mean both companies will continue to push their product lines forward, and Dick’s should benefit from this competition.
When we look at Dick’s gross margin of 31.82%, the company can improve this number in the future. Foot Locker Inc. (NYSE:FL) managed a 33.14% margin in their most recent quarter. Dick’s better locations, and bigger selection, should allow for some margin expansion.
When it comes to new store growth, Dick’s is planning on opening a total of 45 new stores across all of their concepts during 2013. With 599 total stores, this represents new store growth of about 7.5%. The company says they expect same-store sales of 2% to 3% for the full year. Assuming no margin expansion, this should mean revenues would increase by 9.5% to 10.5%.
In the current quarter, Dick’s saw 12% revenue growth equate to a 17% increase in EPS. It makes sense that a 9.5% to 10.5% revenue increase would generate the 15.5% EPS growth analysts are expecting.
What about the valuation?
Relatively speaking, Dick’s Sporting Goods Inc. (NYSE:DKS) looks like a much better value than their two of their biggest customers. Nike, Inc (NYSE:NKE) and Under Armour are currently selling for 2 times, and 1.65 times, their respective growth rates. By comparison, both Dick’s and Foot Locker Inc. (NYSE:FL) trade for about 1 times their expected growth rates.
Since both Dick’s and Foot Locker pay dividends, investors are getting a quarterly check while they wait. While Foot Locker Inc. (NYSE:FL) is a classy organization, Dick’s seems like the better value today. The company’s much smaller store footprint means they have a longer growth track going forward. Dick’s Golf Galaxy concept also holds promise and only has 81 total stores.
Dick’s Sporting Goods Inc. (NYSE:DKS) doesn’t have any problems that long-term investors should worry about. Their investments this year are smart and should create additional sales going forward. It seems like this is just another case of the market overreacting. I would suggest investors add DKS to their personalized Watchlist to keep up with developments.
The article The Market Overreacted originally appeared on Fool.com and is written by Chad Henage.
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